CEOs face pay cut as new corporate code comes into force

New rules tying executive pay to the performance of companies have come into force, setting up the top management of the Nairobi Securities Exchange-listed firms that have issued profit warnings for a possible pay cut.

The Capital Markets Authority (CMA) last Friday gazetted the new corporate governance code, which takes effect immediately, meaning it may start affecting executive pay as early as this year.

The regulations require publicly traded companies to adopt a pay-for-performance formula for remunerating board members and top managers such as chief executive officers (CEOs) and chief finance officers (CFOs).

The legal notice says the remuneration of executive directors “shall include an element that is linked to corporate performance … so as to ensure maximisation of the shareholders’ value”.

“Issuers are encouraged to implement this code immediately but not later than one year after its publication in the Gazette,” said CMA acting CEO Paul Muthaura in a notice published in the Kenya Gazette.

The full application of the regulations would effectively force CEOs and CFOs of the 20 companies that have so far issued profit warnings to take a cut on their pay in line with the dwindling fortunes at the firms they lead.

The rules, however, do not set what percentage of an executive’s total pay shall be tied to the company’s performance.

Also contained in the new rules is a requirement that public listed companies make full disclosure of directors’ take-home — a condition that may lift the lid on executive pay for the 62 actively trading companies on the NSE.

“The remuneration package to directors shall be appropriately disclosed,” said Mr Muthaura in the notice.

The new business governance regulations dubbed ‘Code of Corporate Governance Practices 2015’ are also in line with the Companies Act 2015, which requires all firms to make public directors’ and top management’s pay.

If the new regulations are brought to bear on executive pay based on last year’s performance, the list of CEOs at risk of pay freeze or cut after announcing that profits will fall by at least a quarter would include Kephar Tande (East African Portland Cement Company), Mike du Toit (Liberty Kenya), Benson Wairegi  (Britam), and Mugo Kibati (Pan Africa Insurance).

Lamin Manjang (Standard Chartered Bank), Pradeep Paunrana (ARM Cement), Peter Arina (East African Cables), Hector Diniz (Express Kenya), Allan Walmsley (Sameer Africa) and Sam Shollei of Standard Group would also be on the list.

CfC Stanbic Bank last week announced a 14 per cent dip in profitability, meaning the pay for the incoming CEO, Philip Odera, would be refined to reflect the performance.

The CMA’s performance-based compensation guidelines are meant to protect shareholders who have mostly suffered dividend droughts as company directors award themselves hefty salary increases and bonuses.

National carrier Kenya Airways is one example of a company whose executive pay has not been in line with annual performance — its pay to the top management for the year to March 2014 having increased by a third to Sh103 million despite recording a net loss of Sh3.3 billion.

The airline, however, corrected the anomaly the following year when the total pay for its CEO and CFO dropped by a 10th to Sh95 million as it plunged deeper into the red with an after-tax loss of Sh25.7 billion.

READ: What Kenya’s top firms pay their chief executives

At Mumias Sugar, another loss-making company, the executive directors’ pay surged by a fifth to Sh78.4 million in the financial year ended June 2015, despite the near doubling losses to Sh4.6 billion during the same period.

The newly issued CMA guidelines also require listed companies to give a clear breakdown of what each director earns in terms of basic salary, allowances, cash bonuses, share options and insider borrowing.

Making public benefits paid to directors and top managers such as CEOs and CFOs should offer deeper insights into Kenya’s executive pay structure and improve accountability as investors get a better feel of how directors are rewarded against their performance.

Apart from Safaricom and KCB which have publicly declared what their CEOs take home, most of the NSE-listed companies do not disclose each director’s pay, fees and emoluments — choosing instead to publish lumpsum figures and aggregate items.

Safaricom chief executive Bob Collymore in December declared that he earns $1.068 million (Sh108 million) annually, translating to about Sh9.02 million in monthly salary depending on the volatility of the Kenyan currency.

KCB Group CEO Joshua Oigara followed suit with a declaration that his monthly salary and allowances stand at Sh4.9 million, offering a rare glimpse into the world of executive pay in Kenya.

Former Uchumi CEO Jonathan Ciano pocketed Sh24.45 million in the year to June 2014, which is 8.4 per cent lower than the Sh26.69 million he took home a year earlier. The retailer’s profit grew a paltry 2.05 per cent to Sh364 million in the period under review.

However, a forensic audit by KPMG has revealed that Mr Ciano manipulated books and concealed losses at the retailer, forcing Uchumi to make a Sh1.04 billion “write-off” for book cooking in the year ended June 2015.

Executive pay has been the subject of intense public debate in Kenya, driven by shareholders’ push for deeper disclosures that include performance bonuses and share options.

Kenyan shareholders are banking on the Constitution and the newly enacted Companies Act to force businesses to be more transparent, especially in matters such as directors’ pay, conflict of interest, bribery and corruption.

The CMA’s legal code also dictates rules on the limit of directorships and chairmanships, sets an age limit of 70 years for directors and calls for transparency and succession planning in appointing directors.